Stabilising Economic Growth Through Risk Sharing Macro Instruments

20 Pages Posted: 12 Mar 2018

See all articles by Syed Aun R. Rizvi

Syed Aun R. Rizvi

Lahore University of Management Sciences (LUMS)

Shaista Arshad

University of Nottingham Malaysia Campus

Date Written: March 2018

Abstract

The risk sharing principles of Islamic Finance have ironically been studied and used extensively outside the Muslim World. The development of early European city states was founded on the risk sharing principle. The risk sharing financing helped these city states to develop their infrastructure and rule the scientific and economic landscape of the west. The Western financial system of today still carries traces of risk sharing in the form of venture capital financing, albeit the primary focus has diverted to risk shifting‐based debt financing. Over the past decades, much effort and research has gone into establishing a viable set of Islamic financial institutions. Most Muslim nations are heavily indebted with high reliance on multilateral financing primarily based on high interest rates. This vicious cycle of interest rates and debt has stunted the growth of these nations and worsened the conditions of the masses. This research brings to the forefront the concept of an equity in nature GDP‐linked paper, which allows for enhanced risk sharing‐based sovereign financing. It aims to present empirical proof of the stability this instrument offers in economic growth, for a large sample of developing economies, comprising bulk of Islamic countries. While analysing the empirical work, a strong favourable argument for this instrument is derived for its benefits in stability. Through this study, we endeavour to initiate a thought‐provoking and practical discussion for further development of these instruments for the betterment of developing countries.

Suggested Citation

Rizvi, Syed Aun R. and Arshad, Shaista, Stabilising Economic Growth Through Risk Sharing Macro Instruments (March 2018). The World Economy, Vol. 41, Issue 3, pp. 781-800, 2018, Available at SSRN: https://ssrn.com/abstract=3137364 or http://dx.doi.org/10.1111/twec.12513

Syed Aun R. Rizvi (Contact Author)

Lahore University of Management Sciences (LUMS)

D.H.A, Lahore Cantt
Lahore, Punjab 54792
Pakistan

Shaista Arshad

University of Nottingham Malaysia Campus

Jalan Broga
Semenyih, 43500
Malaysia

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